Hong Kong: Corporate Entities in the PRC

Last Updated: 26 September 1995
This article is intended to provide a general guide to the subject matter. Specific advice should be sought about individual circumstances. Further information or advice may be obtained from Linklaters & Paines, Hong Kong office, 14th Floor, Alexandra House, Chater Road, Hong Kong; telephone: (852) 2842 4888; fax: (852) 2810 8133; contact David Mullarkey or Jeremy Parr.

Concept of a corporation and legal person

The concept of a corporation in common law countries is mirrored by the concept of a legal person under PRC law. Under PRC civil law, the subjects of civil law incurring civil rights and liabilities can either be individuals or legal persons.

There are a number of types of legal persons that can exist under PRC law. The most unusual feature of the law in this respect is that generally, each type of legal person structure is governed by a different regulatory regime, which would depend on who the owners of such legal persons were, whether they be the state, foreigners, PRC individuals or PRC collectives.

Legal Person

The term legal person first appeared in Article 2 of the Economic Contract Law of the PRC promulgated in 1981, although this term was not defined in that piece of legislation. It was not until 1986 when the General Principles of Civil Law of the PRC were promulgated that the term was defined. Under Article 36 of the General Principles of Civil Law, legal persons are defined as organisations accorded legal rights and obligations, competent to perform civil acts and able to assume civil liabilities. Article 37 sets out four conditions must be met before such organisations may be accorded the status of a legal person:-

1. it must be established in accordance with the law;

2. it must possess the property and funds necessary to do business;

3. it must have its own name, organisation structure and residence; and

4. it must be capable of independently assuming civil liability.

Article 37 does not explain when an organisation is capable of independently assuming civil liability. Yet one would have thought that an organisation would not be able to independently assume civil liability unless it had the legal capacity to do so, i.e. it was a legal person - see Article 36. The explanation therefore as to what constitutes a legal person is tautologous.

Corporations

Articles 41 and 42 of the General Principles of Civil Law also introduce the concept of a corporation, which is a sub-category of a legal person. The Administrative Regulations of the PRC governing the Registration of Legal Corporations ("Registration Regulations") promulgated in 1988 expand on the types of organisations who must register as a corporaton. In addition to fulfilling the criteria of a legal person set out above, a corporation must also have a set of articles of association and a legal representative.

The following are the types of organisations listed in the Registration Regulations which must register as corporations:-

1. a state-owned enterprise;

2. a collectively owned enterprise;

3. a joint venture between two PRC parties;

4. a sino-foreign equity joint venture, a sino-foreign cooperative joint venture or a wholly foreign owned enterprise established in the PRC;

5. a private enterprise; or

6. any other type of enterprise which is legally required to register as a corporation.

The Registration Regulations provide that a corporation should be registered with the State Administration of Industry and Commerce ("SAIC"). Upon registration, the corporation will be issued with a corporate business licence and formally granted legal person status. The Registration Regulations also state that an enterprise which is legally required to register as a corporation but which has not been so registered shall not be permitted to conduct business activities.


Legal Persons other than Corporations

Under the General Principles of Civil Law, there are legal persons who are not also registered as corporations. Article 50 states that an organisation with independent funds shall have the status of a legal person from its date of establishment, and an organisation which fulfils the criteria of a legal person and which is not required by law to register as a legal person shall acquire the status of a legal person from the date of its establishment. This may be contrasted with an organisation which is required by law to register as a corporation, which would be formally constituted as a legal person only upon its registration.

Organisations that are not Legal Persons

The following are types of organisations that would not qualify as legal persons.

The first type is a representative office, which is a non-profit liaison office set up by foreign investors in the PRC. This does not have the status of a legal person.

The next type of organisation is a branch of a foreign company, which is a concept introduced by the new National Companies Law of the PRC, effective from July this year, and the National Companies Law expressly states that such branches will not have the status of a legal person in the PRC.

The position of a partnership is not clear, because of the lack of legislation in this area. The newly promulgated Shenzhen Partnership Law does not expressly state whether a partnership is or is not a legal person, but provisions with regard to the liability of the partners to the partnership debts suggest that a partnership is not a legal person enjoying limited liability.

Types of Corporations

State Owned Enterprises

The granting of a legal existence to a state owned enterprise separate from that of the state is a manifestation of the PRC government's desire to divorce itself from the day to day management of, and to grant greater autonomy and self responsibility to, such enterprises.

These principles are embodied in the Provisional Regulations of State Owned Enterprises promulgated in 1983, which formally separated the state's ownership of the enterprise from its management and operation.

In 1988, the State Owned Enterprise Law was promulgated. The State Owned Enterprise Law expanded the concept of a state owned enterprise as a legal person by elaborating various rights and obligations of such enterprises and more importantly, reduced the adminstrative control by government agencies over the management of such enterprises, which hitherto still had been unclear. Articles 55 to 58 of the State Enterprise Law limit the governmental function to providing services to and supervising the activities of the state owned enterprises.

Collectively owned enterprises

Collectively owned enterprises stem from the collectives which were originally formed in local communities by craftsmen, traders or farmers to engage in light manufacturing and the processing of agricultural products. All collectively owned enterprises are legal persons and their assets are the common property of the group as a whole. Unlike state owned enterprises, collectively owned enterprises are subject to little regulation and thus are permitted more independence for rapid development. In 1990, the Regulations on Collectively Owned Enterprises of the PRC conferred upon such enterprises the right to deal directly with foreign businesses in import and export transactions.

Foreign investment enterprises: joint equity ventures, joint cooperative ventures and wholly foreign-owned enterprises

These enterprises are established by foreign investors in the PRC, and are governed by the laws of the PRC.

A joint equity venture is a vehicle formed by foreign and PRC parties which will carry out the business venture. The regulations governing joint equity ventures are clear that such an organisation is a separate legal person from its constituent joint venture parties and may enjoy limited liability.

The position is not so clear with a joint cooperative venture. It is not stated in the regulations governing such ventures that they are legal persons separate from the constituent joint venture parties, nor that they have limited liability. The Registration Regulations appear to say that joint cooperative venturesmust be registered as corporations, but first, such enterprises must fulfil the conditions of a legal person, one of which is the ability to independently assume civil liability, which rather begs the question as to whether a joint cooperative venture is capable of so doing. There are a wide range of cooperative ventures, some of which involve no more than a loose business cooperation between the parties and in respect of which it may be inappropriate to establish a separate legal entity in order to carry out the parties' intentions. Suffice to say, in practice, some joint cooperative ventures do register as corporations and thereby enjoy the status of a legal person, whereas others do not.

Wholly foreign owned enterprises are enterprises set up by foreign investors only and do not involve any PRC parties. Such enterprises are accorded the status of a legal person under the relevant regulations governing their operation.

Companies

The concept of a shareholding company was introduced in the 1980s, and the laws in this respect went through a succession of changes in the early 1990s. A body of regulations which provided for the conversion of state owned enterprises into shareholding companies, or "experimental share enterprises" as they were called under those regulations, was promulgated in 1992. Further regulations were issued at the same time allowing companies to issue B shares to foreign investors, in addition to issuing A shares to PRC investors. In 1993, the concept of PRC companies listing on the Hong Kong Stock Exchange was introduced, whereby such companies would issue H shares to investors in Hong Kong and elsewhere. The legislation regarding H share companies was promulgated in the PRC as well as set out in the Listing Rules of the Hong Kong Stock Exchange. All in all, in the period between 1992 and 1993, there was a wide variety of company law and securities regulations issued at both the national and local level, which rendered the picture rather confusing. The company law legislation culminated in the promulgation of the National Companies Law of the PRC in December 1993, which became effective from July 1994.

The National Companies Law is generally understood to supersede all previous national and local regulations on the subject of company law.

The National Companies Law provides two forms of a company. The first is a limited liability company, which is similar to a company limited by guarantee under common law principles, whereby the shareholders are liable towards the company to the extent of their respective capital contributions and the company has benefit of limited liability; however, the shareholders' interests in the company are not denominated by shares. The second form of a company is a company limited by shares, which is similar to a joint stock company under common law principles. The shareholders will be liable towards the company to the extent of their respective shareholdings, and the company will also enjoy limited liability.

The National Companies Law also introduces the concept of a wholly state owned company, which is a limited liability company invested in and established solely by the state.

In addition, there is also a new concept of a foreign company branch, which are branches established in the PRC by foreign companies but which expressly do not have the status of a legal person in the PRC separate from its foreign parent. It is clear that such branches are distinct from foreign investment enterprises such as joint equity ventures, joint cooperative ventures and wholly foreign owned enterprises. It is not clear what bearing such branches have towards representative offices established in the PRC, which hitherto have been governed by a separate body of regulations.

The National Companies Law also has provisions for listed companies, which are companies limited by shares whose shares are listed and traded on a securities exchange in the PRC or elsewhere.

The National Companies Law does not state that all existing corporations must be converted into companies, which means that existing state-owned enterprises, collectives, foreign investment enterprises and other corporate legal persons need not undergo a conversion into a company, and may remain as they are.

Further information or advice may be obtained from Linklaters & Paines, Hong Kong office, 14th Floor, Alexandra House, Chater Road, Hong Kong; telephone: (852) 2842 4888; fax: (852) 2810 8133; contact David Mullarkey or Jeremy Parr.

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